US regulators are placing strict perimeter around stablecoins, stating fully backed stablecoins cannot be treated like insured bank deposits.
The Federal Deposit Insurance Corporation (FDIC) has announced payment stablecoins will not qualify for any form of federal deposit insurance as part of rules developed to alongside the GENIUS Act.
Speaking at the American Bankers Association Washington Summit on 11 March, FDIC Chairman Travis Hill said the payment stablecoins will not be eligible for deposit insurance, including third-party “pass-through” coverage.
Pass-through insurance allows deposits placed at a bank by a third party on behalf of customers to receive the same protection as if the funds had been deposited directly by those customers.
This is widely used by broker-dealers, fintechs, prepaid card networks and deposit placement services which hold customer funds in pooled accounts at insured banks.
The FDIC typically insures each end-customer’s share of the pooled deposit rather than applying the standard $250,000 limit to the corporate account itself. Hill said such structures raise questions when applied to stablecoins, particularly where issuers hold reserves in bank accounts which back digital tokens circulating among users.
“The GENIUS Act makes clear that payment stablecoins are not ‘subject to deposit insurance’ or guaranteed by the US government,” Hill said.
He added the legislation also prohibits issuers or other parties from representing “that payment stablecoins are backed by the full faith and credit of the US, guaranteed by the US Government, or subject to Federal deposit insurance or Federal share insurance.”
Hill said the FDIC is now preparing a proposal which would formally state stablecoins subject to the GENIUS Act cannot qualify for pass-through insurance.
FDIC presents its reasoning
The issue has attracted a lot of attention because the GENIUS Act does not explicitly address whether pass-through insurance could apply to stablecoins.
Hill noted under normal pass-through rules the FDIC treats end customers as the depositors. Applying the same logic to stablecoin holders would mean insuring deposits based on their holdings, even though the law states stablecoins are not subject to federal deposit insurance.
“Treating stablecoin holders as the insured depositors, even on a pass-through basis, seems inconsistent with the GENIUS Act’s prohibition on payment stablecoins being ‘subject to Federal deposit insurance,’” Hill said.
He also highlighted third parties offering pass-through insurance usually promote the availability of FDIC protection to their customers.
“It seems hard to rationalise the GENIUS Act’s firm prohibition on marketing stablecoins as subject to deposit insurance if stablecoins were intended to serve as an access mechanism for FDIC-insured deposit accounts,” he said.
Hill said the FDIC wants to resolve the issue through regulation rather than making after the system fails.
“In my view, we should answer this question definitively by regulation, rather than waiting until a bank that holds stablecoin reserves fails, when different parties may have different expectations on the availability of FDIC insurance,” he said.
The proposal could also have wider implications for how stablecoin reserves interact with the traditional banking system.
Hill said that if stablecoins were able to qualify for pass-through insurance it could make them more attractive to users and encourage issuers to hold reserves in insured bank accounts. However, it would also increase the exposure of the Deposit Insurance Fund to the stablecoin market.
“It is difficult to estimate the extent to which stablecoin arrangements would qualify for pass-through insurance if they were eligible,” he said.
